First Watch Restaurant Group Inc.

11/03/2026 | Press release | Distributed by Public on 11/03/2026 07:12

Quarterly Report for Quarter Ending September 27, 2026 (Form 10-Q)

Management's Discussion and Analysis of Financial Condition and Results of Operations
Cautionary Statement
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the unaudited interim consolidated financial statements and notes thereto included in Part I, Item 1 of this Form 10-Q and our audited consolidated financial statements and notes included in our 2025 Form 10-K. As discussed in the "Cautionary Note Regarding Forward-Looking Statements," the following discussion and analysis contains forward-looking statements that involve risks and uncertainties. Our actual results may materially differ from those discussed in such forward-looking statements. Factors that could cause or contribute to these differences include, but are not limited to, those identified in our 2025 Form 10-K, including under "Item 1A. Risk Factors" and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations," and in "Part II, Item 1A. Risk Factors" of this Form 10-Q.
References to "we," "us," "our," "the Company" and "Management" in this Management's Discussion and Analysis of Financial Condition and Results of Operation ("MD&A") refer to First Watch Restaurant Group, Inc., collectively with its wholly-owned subsidiaries.
Overview
First Watch is an award-winning Daytime Dining concept serving made-to-order breakfast, brunch and lunch using fresh ingredients. Our common stock trades on Nasdaq under the ticker symbol "FWRG." A recipient of many local "Best Breakfast" and "Best Brunch" accolades, First Watch's award-winning chef-driven menu includes elevated executions of classic favorites alongside innovative dishes and fresh juices. For four consecutive years, First Watch has been named a Top 100 Most Loved Workplace® by the Best Practice Institute, and in 2025, was named the #1 Most Loved Workplace for the second year in a row, as featured in The Wall Street Journal.
We employ more than 19,000 employees, operate and franchise restaurants in 33 states under the "First Watch" trade name and, as of September 27, 2026, had 601 company-owned restaurants and 80 franchise-owned restaurants.
Recent Developments
Financial highlights for the thirteen weeks ended September 27, 2026 ("third quarter of 2026") as compared to the thirteen weeks ended September 28, 2025 ("third quarter of 2025") reflect the continued momentum of our operating performance and include the following:
•Opened 16 system-wide restaurants in 11 states resulting in a total of 681 system-wide restaurants (601 company-owned and 80 franchise-owned) across 33 states as of September 27, 2026
•Total revenues increased 10.7% to $349.9 million from $316.0 million
•System-wide sales increased 10.9% to $391.2 million from $352.7 million
•Same-restaurant sales growth of 1.0%
•Same-restaurant traffic growth of negative 1.9%
•Income from operations margin remained flat at 3.2%
•Restaurant level operating profit margin* decreased to 19.4% from 19.7%
•Net income increased to $4.8 million, or $0.08 per diluted share, from net income of $3.0 million, or $0.05 per diluted share
•Adjusted EBITDA* increased to $39.7 million from $34.1 million
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* See Non-GAAP Financial Measures Reconciliations section below.
Business Trends
In the third quarter of 2026, we experienced same-restaurant sales growth of 1.0% and same-restaurant traffic growth of negative 1.9%. We expect annual same-restaurant sales growth to be approximately 2.0%.
We experienced commodity deflation of 0.4% in the third quarter of 2026, primarily due to lower costs of bacon and avocados, somewhat offset by an increase in turkey sausage prices and the demand for higher cost beef offerings. We expect our full year commodity inflation to be approximately flat.
Restaurant-level wage inflation during the third quarter of 2026 was 4.1% and full year inflation is expected to be approximately 4.0%.
Key Performance Indicators
Throughout this MD&A, we discuss the following key operating metrics that we believe will drive our financial results and long-term growth model. We believe these metrics are useful to investors because Management uses these metrics to evaluate performance and assess the growth of our business as well as the effectiveness of our marketing and operational strategies.
New Restaurant Openings ("NROs"): the number of new company-owned First Watch restaurants commencing operations during the period. Management reviews the number of new restaurants to assess new restaurant growth and company-owned restaurant sales.
Franchise-owned New Restaurant Openings ("Franchise-owned NROs"): the number of new franchise-owned First Watch restaurants commencing operations during the period.
Same-Restaurant Sales Growth: the percentage change in year-over-year restaurant sales (excluding gift card breakage) for the comparable restaurant base, which we define as the number of company-owned First Watch branded restaurants open for 18 months or longer as of the beginning of the fiscal year ("Comparable Restaurant Base"). For the thirteen and thirty-nine weeks ended September 27, 2026 and September 28, 2025, there were 454 restaurants and 381 restaurants, respectively, in our Comparable Restaurant Base. Measuring our same-restaurant sales growth allows Management to evaluate the performance of our existing restaurant base. We believe this measure is useful for investors to provide a consistent comparison of restaurant sales results and trends across periods within our core, established restaurant base, unaffected by results of store openings, closings, and other transitional changes.
Same-Restaurant Traffic Growth: the percentage change in year-over-year traffic counts using the Comparable Restaurant Base. Measuring our same-restaurant traffic growth allows Management to evaluate the performance of our existing restaurant base. We believe this measure is useful for investors because same-restaurant traffic provides an indicator as to the development of our brand and the effectiveness of our marketing strategy.
System-wide restaurants: the total number of restaurants, including all company-owned and franchise-owned restaurants.
System-wide sales: consists of restaurant sales from our company-owned restaurants and franchise-owned restaurants. We do not recognize the restaurant sales from our franchise-owned restaurants as revenue.
Non-GAAP Financial Measures
To supplement the consolidated financial statements, which are prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"), we use the following non-GAAP measures, which present operating results on an adjusted basis: (i) Adjusted EBITDA, (ii) Adjusted EBITDA margin, (iii) Restaurant level operating profit and (iv) Restaurant level operating profit margin. Our presentation of these non-GAAP measures includes isolating the effects of some items that are either nonrecurring in nature or have no meaningful correlation to our ongoing core operating performance. These supplemental measures of performance are not required by or presented in accordance with GAAP. Management believes these non-GAAP measures provide investors with additional visibility into our operations, facilitate analysis and comparisons of our ongoing business operations because they exclude items that may not be indicative of our ongoing operating performance, help to identify operational trends and allow for greater transparency with respect to metrics used by Management in our financial and operational decision making. Our non-GAAP measures may not be comparable to similarly titled measures used by other companies and have important limitations as analytical tools. These non-GAAP measures should not be considered in isolation or as substitutes for analysis of our results as reported under GAAP as they may not provide a complete understanding of our performance. These non-GAAP measures should be reviewed in conjunction with our consolidated financial statements prepared in accordance with GAAP.
We use Adjusted EBITDA and Adjusted EBITDA margin (i) as factors in evaluating Management's performance when determining incentive compensation, (ii) to evaluate our operating results and the effectiveness of our business strategies and (iii) internally as benchmarks to compare our performance to that of our competitors.
We use Restaurant level operating profit and Restaurant level operating profit margin (i) to evaluate the performance and profitability of operating restaurants, individually and in the aggregate, and (ii) to make decisions regarding future spending and other operational decisions.
Adjusted EBITDA: represents Net income before depreciation and amortization, interest expense, income taxes, and items that we do not consider in our evaluation of ongoing core operating performance as identified in the reconciliation of Net income, the most directly comparable measure in accordance with GAAP, to Adjusted EBITDA, included in the section Non-GAAP Financial Measure Reconciliations below.
Adjusted EBITDA Margin: represents Adjusted EBITDA as a percentage of total revenues. See Non-GAAP Financial Measure Reconciliations below for a reconciliation to Net income margin, the most directly comparable GAAP measure.
Restaurant Level Operating Profit: represents restaurant sales, less restaurant operating expenses, which include food and beverage costs, labor and other related expenses, other restaurant operating expenses, pre-opening expenses and occupancy expenses. Restaurant level operating profit excludes corporate-level expenses and other items that we do not consider in the evaluation of the ongoing core operating performance of our restaurants as identified in the reconciliation of Income from operations, the most directly comparable GAAP measure, to Restaurant level operating profit, included in the section Non-GAAP Financial Measure Reconciliations below.
Restaurant Level Operating Profit Margin: represents Restaurant level operating profit as a percentage of restaurant sales. See Non-GAAP Financial Measure Reconciliations below for a reconciliation to Income from operations margin, the most directly comparable GAAP measure.
Selected Operating Data
THIRTEEN WEEKS ENDED SEPTEMBER 27, 2026
COMPANY-OWNED FRANCHISE-OWNED TOTAL
Beginning of period
586 79 665
New restaurant openings
15 1 16
Closures
- - -
End of period
601 80 681
THIRTY-NINE WEEKS ENDED SEPTEMBER 27, 2026
COMPANY-OWNED FRANCHISE-OWNED TOTAL
Beginning of period
560 73 633
New restaurant openings
42 8 50
Closures
(1) (1) (2)
End of period
601 80 681
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
SEPTEMBER 27, 2026 SEPTEMBER 28, 2025 SEPTEMBER 27, 2026 SEPTEMBER 28, 2025
System-wide sales (in thousands) $ 391,192 $ 352,688 $ 1,155,803 $ 1,021,896
Same-restaurant sales growth 1.0 % 7.1 % 2.4 % 3.7 %
Same-restaurant traffic growth (1.9) % 2.6 % (1.4) % 1.3 %
Income from operations (in thousands) $ 11,048 $ 10,050 $ 20,174 $ 18,476
Income from operations margin 3.2 % 3.2 % 2.0 % 2.1 %
Restaurant level operating profit (in thousands) (1)
$ 67,343 $ 61,675 $ 194,149 $ 164,573
Restaurant level operating profit margin (1)
19.4 % 19.7 % 18.9 % 18.3 %
Net income (in thousands) $ 4,787 $ 2,991 $ 4,441 $ 4,268
Net income margin 1.4 % 0.9 % 0.4 % 0.5 %
Adjusted EBITDA (in thousands) (2)
$ 39,748 $ 34,099 $ 102,015 $ 87,231
Adjusted EBITDA margin (2)
11.4 % 10.8 % 9.9 % 9.6 %
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(1) Reconciliations from Income from operations and Income from operations margin, the most comparable GAAP measures to Restaurant level operating profit and Restaurant level operating profit margin, respectively, are set forth in the tables within the Non-GAAP Financial Measures Reconciliations section below.
(2) Reconciliations from Net income and Net income margin, the most comparable GAAP measures to Adjusted EBITDA and Adjusted EBITDA margin, respectively, are set forth in the tables within the Non-GAAP Financial Measures Reconciliations section below.
Results of Operations
The following table summarizes our results of operations and the percentages of items in our Consolidated Statements of Operations and Comprehensive Income in relation to Total revenues or, where indicated, Restaurant sales for the thirteen and thirty-nine weeks ended September 27, 2026 and September 28, 2025:
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
(in thousands) SEPTEMBER 27, 2026 SEPTEMBER 28, 2025 SEPTEMBER 27, 2026 SEPTEMBER 28, 2025
Revenues
Restaurant sales $ 346,722 99.1 % $ 313,636 99.2 % $ 1,026,351 99.1 % $ 898,210 99.1 %
Franchise revenues 3,139 0.9 % 2,386 0.8 % 9,141 0.9 % 7,939 0.9 %
Total revenues 349,861 100.0 % 316,022 100.0 % 1,035,492 100.0 % 906,149 100.0 %
Operating costs and expenses
Restaurant operating expenses (1) (exclusive of depreciation and amortization shown below):
Food and beverage costs 77,402 22.3 % 69,730 22.2 % 234,305 22.8 % 208,355 23.2 %
Labor and other related expenses 112,962 32.6 % 102,387 32.6 % 339,294 33.1 % 300,451 33.4 %
Other restaurant operating expenses 56,048 16.2 % 50,140 16.0 % 163,509 15.9 % 141,002 15.7 %
Occupancy expenses 29,506 8.5 % 25,891 8.3 % 85,261 8.3 % 73,849 8.2 %
Pre-opening expenses 3,461 1.0 % 3,813 1.2 % 9,833 1.0 % 9,980 1.1 %
General and administrative expenses 35,244 10.1 % 33,746 10.7 % 113,916 11.0 % 97,150 10.7 %
Depreciation and amortization 22,700 6.5 % 19,662 6.2 % 65,935 6.4 % 54,355 6.0 %
Impairments and loss on disposal of assets 170 - % 175 0.1 % 437 - % 311 - %
Transaction and restructuring expenses, net 1,320 0.4 % 428 0.1 % 2,828 0.3 % 2,220 0.2 %
Total operating costs and expenses 338,813 96.8 % 305,972 96.8 % 1,015,318 98.1 % 887,673 98.0 %
Income from operations (1)
11,048 3.2 % 10,050 3.2 % 20,174 2.0 % 18,476 2.1 %
Interest expense (4,933) (1.4) % (4,567) (1.4) % (14,603) (1.4) % (11,904) (1.3) %
Other income, net 362 0.1 % 191 0.1 % 840 0.1 % 1,141 0.1 %
Income before income taxes 6,477 1.9 % 5,674 1.8 % 6,411 0.6 % 7,713 0.9 %
Income tax expense (1,690) (0.5) % (2,683) (0.8) % (1,970) (0.2) % (3,445) (0.4) %
Net income $ 4,787 1.4 % $ 2,991 0.9 % $ 4,441 0.4 % $ 4,268 0.5 %
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(1) As a percentage of restaurant sales.
Restaurant Sales
Restaurant sales represent the aggregate sales of food and beverages, net of discounts, at company-owned restaurants. Restaurant sales in any period are directly influenced by the number of operating weeks in the period, the number of open restaurants, customer traffic and average check. Average check growth is the combined result of our menu price increases and changes to our menu mix.
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
(in thousands) SEPTEMBER 27, 2026 SEPTEMBER 28, 2025 Change SEPTEMBER 27, 2026 SEPTEMBER 28, 2025 Change
Restaurant sales:
In-restaurant dining sales $ 279,365 $ 254,155 9.9 % $ 829,383 $ 728,282 13.9 %
Third-party delivery sales 42,442 37,163 14.2 % 123,477 103,633 19.1 %
Take-out sales 24,915 22,318 11.6 % 73,491 66,295 10.9 %
Total restaurant sales $ 346,722 $ 313,636 10.5 % $ 1,026,351 $ 898,210 14.3 %
The increase in total restaurant sales during the thirteen weeks ended September 27, 2026 as compared to the same period in the prior year was due principally to (i) a higher number of company-owned restaurants from new openings and (ii) menu price increases, partially offset by an increase in promotional usage and a (1.9)% decrease in same-restaurant traffic.
The increase in total restaurant sales during the thirty-nine weeks ended September 27, 2026 as compared to the same period in the prior year was due principally to (i) a higher number of company-owned restaurants from new openings, (ii) the acquisition of 19 franchise-owned restaurants during the second quarter of 2025 and (iii) menu price increases, partially offset by an increase in promotional usage and a 1.4% decrease in same-restaurant traffic.
Franchise Revenues
Franchise revenues are comprised of sales-based royalty fees, system fund contributions and the amortization of upfront initial franchise fees, which are recognized as revenue on a straight-line basis over the term of the franchise agreement. Franchise revenues in any period are directly influenced by the number of open franchise-owned restaurants.
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
(in thousands) SEPTEMBER 27, 2026 SEPTEMBER 28, 2025 Change SEPTEMBER 27, 2026 SEPTEMBER 28, 2025 Change
Franchise revenues:
Royalty and system fund contributions $ 3,077 $ 2,333 31.9 % $ 8,941 $ 7,371 21.3 %
Initial fees 62 53 17.0 % 200 170 17.6 %
Business acquisitions - franchise revenues recognized - - - % - 398 (100.0) %
Total Franchise revenues $ 3,139 $ 2,386 31.6 % $ 9,141 $ 7,939 15.1 %
The increases in franchise revenues during the thirteen and thirty-nine weeks ended September 27, 2026 as compared to the same periods in the prior year was due to (i) an increase in the system fund contribution rate during the first quarter of 2026 and (ii) 9 new franchise-owned restaurant openings between September 28, 2025 and September 27, 2026. The increase for the thirty-nine weeks ended September 27, 2026 was partially offset by one franchise-owned restaurant closure and our acquisitions of 19 franchise-owned restaurants during the second quarter of 2025.
Food and Beverage Costs
Food and beverage costs at company-owned restaurants vary with sales volume and are subject to increases and declines in commodity costs.
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
(in thousands) SEPTEMBER 27, 2026 SEPTEMBER 28, 2025 Change SEPTEMBER 27, 2026 SEPTEMBER 28, 2025 Change
Food and beverage costs $ 77,402 $ 69,730 11.0 % $ 234,305 $ 208,355 12.5 %
As a percentage of restaurant sales 22.3 % 22.2 % 0.1 % 22.8 % 23.2 % (0.4) %
Food and beverage costs as a percentage of restaurant sales increased during the thirteen weeks ended September 27, 2026 as compared to the same period in the prior year primarily as a result of the timing of vendor credits that did not recur in the same period in 2026, partially offset by (i) menu price increases and (ii) the lower cost of bacon and avocados, partially offset by an increase in the cost of turkey sausage and the demand for higher cost beef offerings.
Food and beverage costs as a percentage of restaurant sales decreased during the thirty-nine weeks ended September 27, 2026 as compared to the same period in the prior year primarily as a result of (i) menu price increases and (ii) the lower cost of bacon, eggs, and avocados, partially offset by the higher cost of coffee and the demand for higher cost beef offerings.
Food and beverage costs increased during the thirteen and thirty-nine weeks ended September 27, 2026 as compared to the same periods in the prior year primarily as a result of an increase in the number of company-owned restaurants between September 28, 2025 and September 27, 2026. These increases were partially offset by commodity deflation.
Labor and Other Related Expenses
Labor and other related expenses include hourly and management wages, bonuses, payroll taxes, workers' compensation expense and employee benefits. Factors that influence labor costs include minimum wage and payroll tax legislation, health care costs, the number and performance of our company-owned restaurants and competition for qualified staff.
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
(in thousands) SEPTEMBER 27, 2026 SEPTEMBER 28, 2025 Change SEPTEMBER 27, 2026 SEPTEMBER 28, 2025 Change
Labor and other related expenses $ 112,962 $ 102,387 10.3 % $ 339,294 $ 300,451 12.9 %
As a percentage of restaurant sales 32.6 % 32.6 % - % 33.1 % 33.4 % (0.3) %
Labor and other related expenses as a percentage of restaurant sales remained flat for the thirteen weeks ended September 27, 2026 as compared to the same period in the prior year primarily as a result of the leverage associated with menu price increases, offset by wage increases.
Labor and other related expenses as a percentage of restaurant sales decreased during the thirty-nine weeks ended September 27, 2026 as compared to the same period in the prior year primarily as a result of the leverage associated with menu price increases, partially offset by wage increases.
The increases in labor and other related expenses during the thirteen and thirty-nine weeks ended September 27, 2026 as compared to the same periods in the prior year were primarily due to (i) the increase in the number of company-owned restaurants and related headcount and (ii) wage increases.
Other Restaurant Operating Expenses
Other restaurant operating expenses consist of utilities, insurance, marketing and advertising expenses and other variable expenses incidental to operating company-owned restaurants, such as operating supplies (including paper products, menus and to-go supplies), third-party delivery services fees, credit card fees and repairs and maintenance expenses.
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
(in thousands) SEPTEMBER 27, 2026 SEPTEMBER 28, 2025 Change SEPTEMBER 27, 2026 SEPTEMBER 28, 2025 Change
Other restaurant operating expenses $ 56,048 $ 50,140 11.8 % $ 163,509 $ 141,002 16.0 %
As a percentage of restaurant sales 16.2 % 16.0 % 0.2 % 15.9 % 15.7 % 0.2 %
Other restaurant operating expenses as a percentage of restaurant sales increased during the thirteen and thirty-nine weeks ended September 27, 2026 as compared to the same periods in the prior year primarily due to an increase in (i) utilities and (ii) third-party delivery fees.
The increase in other restaurant operating expenses during the thirteen weeks ended September 27, 2026 as compared to the same period in the prior year was primarily due to the increase in the number of company-owned restaurants driving increased expenses, including (i) $2.0 million related to utilities, repairs and maintenance expenses, (ii) $1.3 million in third-party delivery fees, (iii) $1.1 million in operating supplies and (iv) $1.1 million in credit card fees.
The increase in other restaurant operating expenses during the thirty-nine weeks ended September 27, 2026 as compared to the same period in the prior year was primarily due to the increase in the number of company-owned restaurants driving increased expenses, including (i) $7.9 million related to utilities, repairs and maintenance expenses, (ii) $5.6 million in operating supplies, (iii) $4.5 million in third-party delivery fees and (iv) $3.0 million in credit card fees.
Occupancy Expenses
Occupancy expenses primarily consist of rent expense, property insurance, common area expenses and property taxes.
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
(in thousands) SEPTEMBER 27, 2026 SEPTEMBER 28, 2025 Change SEPTEMBER 27, 2026 SEPTEMBER 28, 2025 Change
Occupancy expenses $ 29,506 $ 25,891 14.0 % $ 85,261 $ 73,849 15.5 %
As a percentage of restaurant sales 8.5 % 8.3 % 0.2 % 8.3 % 8.2 % 0.1 %
Occupancy expenses as a percentage of restaurant sales increased during the thirteen and thirty-nine weeks ended September 27, 2026 as compared to the same periods in the prior year primarily due to higher rent expense associated with new restaurants.
The increases in occupancy expenses during the thirteen and thirty-nine weeks ended September 27, 2026 as compared to the same periods in the prior year were primarily due to the increase in the number of company-owned restaurants.
Pre-opening Expenses
Pre-opening expenses are costs incurred to open new company-owned restaurants. Pre-opening expenses include rent expense, manager salaries, recruiting expenses, employee payroll and training costs. Pre-opening expenses can fluctuate from period to period, based on the number and timing of new company-owned restaurant openings.
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
(in thousands) SEPTEMBER 27, 2026 SEPTEMBER 28, 2025 Change SEPTEMBER 27, 2026 SEPTEMBER 28, 2025 Change
Pre-opening expenses $ 3,461 $ 3,813 (9.2) % $ 9,833 $ 9,980 (1.5) %
The decrease in pre-opening expenses during the thirteen and thirty-nine weeks ended September 27, 2026 as compared to the same periods in the prior year was primarily due to the lower number of new company-owned restaurants opened during the 2026 periods.
General and Administrative Expenses
General and administrative expenses primarily consist of costs associated with our corporate and administrative functions that support restaurant development and operations including marketing and advertising costs incurred as well as legal fees, professional fees, stock-based compensation and expenses associated with being a public company, including costs associated with our compliance with the Sarbanes-Oxley Act. General and administrative expenses are impacted by changes in our employee headcount and costs related to strategic and growth initiatives.
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
(in thousands) SEPTEMBER 27, 2026 SEPTEMBER 28, 2025 Change SEPTEMBER 27, 2026 SEPTEMBER 28, 2025 Change
General and administrative expenses $ 35,244 $ 33,746 4.4 % $ 113,916 $ 97,150 17.3 %
The increase in general and administrative expenses during the thirteen weeks ended September 27, 2026 as compared to the same period in the prior year was mainly due to (i) a $1.7 million increase in compensation expenses related to stock-based compensation and additional employee headcount to support growth, (ii) a $0.5 million increase in licenses and fees including information technology related expenses for an increased number of restaurants and (iii) a $0.4 million increase in marketing expenses. The increase was partially offset by a decrease in consulting, legal and other professional service fees.
The increase in general and administrative expenses during the thirty-nine weeks ended September 27, 2026 as compared to the same period in the prior year was mainly due to (i) a $6.2 million increase in compensation expenses related to stock-based compensation, bonus expenses and additional employee headcount to support growth, (ii) a $6.1 million increase in marketing expenses, (iii) a $3.9 million increase related to 2026 leadership conference expenses and (iv) a $1.7 million increase in licenses and fees including information technology related expenses for an increased number of restaurants. The increase was partially offset by a decrease in consulting, legal and other professional service fees.
Depreciation and Amortization
Depreciation and amortization consists of the depreciation of fixed assets, including leasehold improvements, fixtures and equipment and the amortization of definite-lived intangible assets, which are primarily comprised of franchise rights.
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
(in thousands) SEPTEMBER 27, 2026 SEPTEMBER 28, 2025 Change SEPTEMBER 27, 2026 SEPTEMBER 28, 2025 Change
Depreciation and amortization $ 22,700 $ 19,662 15.5 % $ 65,935 $ 54,355 21.3 %
The increases in depreciation and amortization during the thirteen and thirty-nine weeks ended September 27, 2026 as compared to the same periods in the prior year were primarily related to depreciating and amortizing the assets of NROs and of acquired restaurants, including reacquired rights from franchisees.
Transaction and Restructuring Expenses, Net
Transaction and restructuring expenses, net principally include (i) incremental severance costs resulting from organizational optimization, (ii) costs incurred in connection with the 2025 acquisitions of franchise-owned restaurants, (iii) non-recurring professional fees, (iv) investor relations costs and (v) costs related to secondary equity offerings completed in 2025.
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
(in thousands) SEPTEMBER 27, 2026 SEPTEMBER 28, 2025 Change SEPTEMBER 27, 2026 SEPTEMBER 28, 2025 Change
Transaction and restructuring expenses, net $ 1,320 $ 428 208.4 % $ 2,828 $ 2,220 27.4 %
The increase in transaction and restructuring expenses, net during the thirteen weeks ended September 27, 2026 as compared to the same period in the prior year was primarily due to an increase in costs related to (i) non-recurring professional fees and (ii) investor day costs. The increase was partially offset by secondary equity offering costs incurred in 2025 that did not recur in 2026.
The increase in transaction and restructuring expenses, net during the thirty-nine weeks ended September 27, 2026 as compared to the same period in the prior year was primarily due to an increase in (i) organizational optimization costs, (ii) costs related to non-recurring professional fees and (iii) investor day costs. The increase was partially offset by costs incurred in connection with (i) 2025 acquisitions and (ii) 2025 secondary equity offering costs that did not recur in 2026.
Income from Operations
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
(in thousands) SEPTEMBER 27, 2026 SEPTEMBER 28, 2025 Change SEPTEMBER 27, 2026 SEPTEMBER 28, 2025 Change
Income from operations $ 11,048 $ 10,050 9.9 % $ 20,174 $ 18,476 9.2 %
As a percentage of restaurant sales 3.2 % 3.2 % - % 2.0 % 2.1 % (0.1) %
Income from operations margin remained flat during the thirteen weeks ended September 27, 2026, compared to the same period in the prior year, as revenue increases and a decrease in general and administrative expenses as a percentage of restaurant sales were offset by increases in other costs, primarily (i) depreciation and amortization expense, (ii) other restaurant operating expenses and (iii) occupancy expenses.
Income from operations margin decreased during the thirty-nine weeks ended September 27, 2026 compared to the same period in the prior year as revenue increases were exceeded by increases in other costs, primarily (i) depreciation and amortization expense, (ii) labor and other related expenses, (iii) general and administrative expenses, (iv) other restaurant operating expenses and (v) occupancy expenses.
Interest Expense
Interest expense primarily consists of interest and fees on our outstanding debt and the amortization expense for debt discount and deferred issuance costs.
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
(in thousands) SEPTEMBER 27, 2026 SEPTEMBER 28, 2025 Change SEPTEMBER 27, 2026 SEPTEMBER 28, 2025 Change
Interest expense $ 4,933 $ 4,567 8.0 % $ 14,603 $ 11,904 22.7 %
The increase in interest expense during the thirteen and thirty-nine weeks ended September 27, 2026 as compared to the same periods in the prior year was due to increased debt.
Other Income, Net
Other income, net includes items deemed to be non-operating based on Management's assessment of the nature of the item in relation to our core operations.
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
(in thousands) SEPTEMBER 27, 2026 SEPTEMBER 28, 2025 Change SEPTEMBER 27, 2026 SEPTEMBER 28, 2025 Change
Other income, net $ 362 $ 191 89.5 % $ 840 $ 1,141 (26.4) %
Other income, net increased during the thirteen weeks ended September 27, 2026 as compared to the same period in the prior year primarily due to an increase in (i) interest income and (ii) sales tax commissions.
Other income, net decreased during the thirty-nine weeks ended September 27, 2026 as compared to the same period in the prior year primarily due to a decrease in insurance proceeds.
Income Tax
Income tax consists of federal and state taxes.
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
(in thousands) SEPTEMBER 27, 2026 SEPTEMBER 28, 2025 Change SEPTEMBER 27, 2026 SEPTEMBER 28, 2025 Change
Income tax expense $ (1,690) $ (2,683) (37.0) % $ (1,970) $ (3,445) (42.8) %
Effective income tax rate 26.1 % 47.3 % (21.2) % 30.7 % 44.7 % (14.0)%
Income tax expense and the effective income tax rate during the thirteen and thirty-nine weeks ended September 27, 2026 decreased as compared to the same period in the prior year primarily due to (i) the impact of federal FICA tax credits and the related valuation allowance, (ii) stock-based compensation and (iii) certain discrete state income tax matters.
Net Income
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
(in thousands) SEPTEMBER 27, 2026 SEPTEMBER 28, 2025 Change SEPTEMBER 27, 2026 SEPTEMBER 28, 2025 Change
Net income $ 4,787 $ 2,991 60.0 % $ 4,441 $ 4,268 4.1 %
As a percentage of total revenues 1.4 % 0.9 % 0.5 % 0.4 % 0.5 % (0.1) %
Net income increased during the thirteen and thirty-nine weeks ended September 27, 2026 as compared to the same periods in the prior year primarily due to (i) the increase in income from operations and (ii) a decrease in income tax expense, partially offset by an increase in interest expense.
Restaurant Level Operating Profit and Restaurant Level Operating Profit Margin
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
(in thousands) SEPTEMBER 27, 2026 SEPTEMBER 28, 2025 Change SEPTEMBER 27, 2026 SEPTEMBER 28, 2025 Change
Restaurant level operating profit $ 67,343 $ 61,675 9.2 % $ 194,149 $ 164,573 18.0 %
Restaurant level operating profit margin 19.4 % 19.7 % (0.3) % 18.9 % 18.3 % 0.6 %
Restaurant level operating profit margin during the thirteen weeks ended September 27, 2026 decreased as compared to the same period in the prior year primarily due to an increase as a percentage of restaurant sales in (i) other restaurant operating expenses, (ii) occupancy expenses and (iii) food and beverage costs, partially offset by a decrease in pre-opening expenses as a percentage of restaurant sales.
Restaurant level operating profit margin during the thirty-nine weeks ended September 27, 2026 increased as compared to the same period in the prior year primarily due to (i) favorable labor and other related expenses as a percentage of restaurant sales and (ii) favorable food and beverage costs as a percentage of restaurant sales, partially offset by the increase in other restaurant operating expenses as a percentage of restaurant sales.
Restaurant level operating profit for the thirteen and thirty-nine weeks ended September 27, 2026 increased as compared to the same periods in the prior year due to sales growth driven by increases in (i) restaurant locations and (ii) same-restaurant sales. This was partially offset by increases in expenses associated primarily with an increase in the number of company-owned restaurants, including (i) labor and other related expenses, (ii) food and beverage costs, (iii) other restaurant operating expenses and (iv) occupancy expenses.
Adjusted EBITDA and Adjusted EBITDA Margin
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
(in thousands) SEPTEMBER 27, 2026 SEPTEMBER 28, 2025 Change SEPTEMBER 27, 2026 SEPTEMBER 28, 2025 Change
Adjusted EBITDA $ 39,748 $ 34,099 16.6 % $ 102,015 $ 87,231 16.9 %
Adjusted EBITDA margin 11.4 % 10.8 % 0.6 % 9.9 % 9.6 % 0.3 %
Adjusted EBITDA margin increased during the thirteen weeks ended September 27, 2026 compared to the same period in the prior year primarily due to a decrease in general and administrative expenses as a percentage of revenues, partially offset by a decrease in restaurant level operating profit margin.
Adjusted EBITDA margin increased during the thirty-nine weeks ended September 27, 2026 compared to the same period in the prior year primarily due to an increase in restaurant level operating profit margin, partially offset by an increase in general and administrative expenses as a percentage of revenues.
Adjusted EBITDA increased during the thirteen and thirty-nine weeks ended September 27, 2026 compared to the same periods in the prior year primarily due to an increase in restaurant level operating profit, partially offset by an increase in general and administrative expenses.
Non-GAAP Financial Measures Reconciliations
Adjusted EBITDA and Adjusted EBITDA margin - The following table reconciles Net income and Net income margin, the most directly comparable GAAP measures to Adjusted EBITDA and Adjusted EBITDA margin, respectively, for the periods indicated:
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
(in thousands) SEPTEMBER 27, 2026 SEPTEMBER 28, 2025 SEPTEMBER 27, 2026 SEPTEMBER 28, 2025
Net income $ 4,787 $ 2,991 $ 4,441 $ 4,268
Depreciation and amortization 22,700 19,662 65,935 54,355
Interest expense 4,933 4,567 14,603 11,904
Income tax expense 1,690 2,683 1,970 3,445
EBITDA 34,110 29,903 86,949 73,972
Strategic transition costs (1)
509 715 1,113 2,748
Stock-based compensation, net of amounts capitalized (2)
3,639 2,877 10,688 7,926
Delaware Voluntary Disclosure Agreement Program (3)
- 1 - 54
Transaction and restructuring expenses, net (4)
1,320 428 2,828 2,220
Impairments and loss on disposal of assets (5)
170 175 437 311
Adjusted EBITDA $ 39,748 $ 34,099 $ 102,015 $ 87,231
Total revenues $ 349,861 $ 316,022 $ 1,035,492 $ 906,149
Net income margin 1.4 % 0.9 % 0.4 % 0.5 %
Adjusted EBITDA margin 11.4 % 10.8 % 9.9 % 9.6 %
Additional information
Deferred rent (6)
$ (337) $ (141) $ (836) $ 337
_____________________________
(1) Represents costs related to process improvements and strategic initiatives. These costs are recorded within General and administrative expenses on the Consolidated Statements of Operations and Comprehensive Income.
(2) Represents non-cash, stock-based compensation expense, net of amounts capitalized, which is recorded within General and administrative expenses on the Consolidated Statements of Operations and Comprehensive Income.
(3) Represents professional service costs incurred in connection with the Delaware Voluntary Disclosure Agreement Program related to unclaimed or abandoned property. These costs are recorded in General and administrative expenses on the Consolidated Statements of Operations and Comprehensive Income.
(4) Represents severance costs resulting from organizational optimization, costs incurred in connection with the acquisition of franchise-owned restaurants, non-recurring professional fees, secondary equity offering costs, costs related to restaurant closures and investor relations costs.
(5) Represents impairment charges and costs related to the disposal of assets due to retirements, replacements and restaurant closures.
(6) Represents the non-cash portion of straight-line rent recorded within both Occupancy expenses and General and administrative expenses on the Consolidated Statements of Operations and Comprehensive Income.
Restaurant level operating profit and Restaurant level operating profit margin - The following table reconciles Income from operations and Income from operations margin, the most comparable GAAP measures to Restaurant level operating profit and Restaurant level operating profit margin, respectively, for the periods indicated:
THIRTEEN WEEKS ENDED THIRTY-NINE WEEKS ENDED
(in thousands) SEPTEMBER 27, 2026 SEPTEMBER 28, 2025 SEPTEMBER 27, 2026 SEPTEMBER 28, 2025
Income from operations $ 11,048 $ 10,050 $ 20,174 $ 18,476
Less: Franchise revenues (3,139) (2,386) (9,141) (7,939)
Add:
General and administrative expenses 35,244 33,746 113,916 97,150
Depreciation and amortization 22,700 19,662 65,935 54,355
Transaction and restructuring expenses, net (1)
1,320 428 2,828 2,220
Impairments and loss on disposal of assets (2)
170 175 437 311
Restaurant level operating profit $ 67,343 $ 61,675 $ 194,149 $ 164,573
Restaurant sales $ 346,722 $ 313,636 $ 1,026,351 $ 898,210
Income from operations margin 3.2 % 3.2 % 2.0 % 2.1 %
Restaurant level operating profit margin 19.4 % 19.7 % 18.9 % 18.3 %
Additional information
Deferred rent(3)
$ (353) $ (168) $ (883) $ 211
_____________________________
(1) Represents severance costs resulting from organizational optimization, costs incurred in connection with the acquisition of franchise-owned restaurants, non-recurring professional fees, secondary equity offering costs, costs related to restaurant closures and investor relations costs.
(2) Represents impairment charges and costs related to the disposal of assets due to retirements, replacements and restaurant closures.
(3) Represents the non-cash portion of straight-line rent recorded within Occupancy expenses on the Consolidated Statements of Operations and Comprehensive Income.
Liquidity and Capital Resources
As of September 27, 2026, we had cash and cash equivalents of $21.1 million and outstanding borrowings under our senior secured credit facility (the "Credit Facility") of $271.7 million, excluding unamortized debt discount and deferred issuance costs. We had availability of $54.0 million under our revolving credit facility of $125.0 million, of which $2.5 million is reserved under letters of credit pursuant to our credit agreement, dated as of October 6, 2021, as amended ("Credit Agreement"). Our principal uses of cash include capital expenditures for the development, acquisition or remodeling of restaurants, lease obligations, debt service payments and strategic infrastructure investments. Our working capital requirements are low due to our restaurants storing minimal inventory and customers paying for their purchases at the time of the sale, which frequently precedes our payment terms with suppliers.
We believe that our cash flow from operations combined with our availability under the Credit Facility and our cash and cash equivalents will be sufficient to meet our liquidity needs for at least the next 12 months. We anticipate that to the extent that we require additional liquidity, or should we decide to pursue one or more significant acquisitions, the funds would be furnished first through additional indebtedness and thereafter through the issuance of equity. Although we believe that our current level of total available liquidity is sufficient to meet our short-term and long-term liquidity requirements, we regularly evaluate opportunities to improve our liquidity position in order to enhance financial flexibility.
We estimate that our capital expenditures will total approximately $145.0 million in 2026. This capital is invested primarily in new restaurant projects and planned remodels. We intend to fund the capital expenditures primarily with cash generated from our operating activities as well as with borrowings pursuant to our Credit Agreement.
Summary of Cash Flows
The following table presents a summary of our cash provided by (used in) operating, investing and financing activities for the thirty-nine weeks ended September 27, 2026 and September 28, 2025:
THIRTY-NINE WEEKS ENDED
(in thousands) SEPTEMBER 27, 2026 SEPTEMBER 28, 2025
Cash provided by operating activities $ 110,445 $ 107,452
Cash used in investing activities (113,949) (175,771)
Cash provided by financing activities 3,323 55,721
Net decrease in cash and cash equivalents $ (181) $ (12,598)
Cash provided by operations is our typical source of liquidity used (i) to fund capital expenditures for new restaurants, (ii) to maintain and remodel existing restaurants and (iii) for debt service. During the thirty-nine weeks ended September 27, 2026 as compared to the thirty-nine weeks ended September 28, 2025, there was an increase in cash provided by operations primarily due to an increase in company-owned restaurants, partially offset by the timing of operational payments.
Cash used in investing activities decreased during the thirty-nine weeks ended September 27, 2026 from the thirty-nine weeks ended September 28, 2025 due principally to (i) amounts paid in 2025 to acquire franchise locations and (ii) the timing of capital expenditures and payments.
Cash provided by financing activities includes borrowing from, and repayments of, the Company's Credit Facility.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations is based upon the accompanying consolidated financial statements and notes thereto, which have been prepared in accordance with GAAP. The preparation of these consolidated financial statements and related notes requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. Certain of our accounting policies require the application of significant judgment by management in selecting the appropriate assumptions for calculating financial estimates. By their nature, these judgments are subject to an inherent degree of uncertainty. These judgments are based on our historical experience, terms of existing contracts, our evaluation of trends in the industry and information available from other outside sources, as appropriate. We evaluate our estimates and judgments on an on-going basis. Our actual results may differ from these estimates. Judgments and uncertainties affecting the application of those policies may result in materially different amounts being reported under different conditions or using different assumptions. There have been no significant changes to our critical accounting policies as disclosed in "Critical Accounting Policies and Estimates" in the 2025 Form 10-K.
Recently Issued Accounting Pronouncements
For a discussion of recently issued accounting pronouncements, see Note 2, Summary of Significant Accounting Policies, in the accompanying notes to these consolidated financial statements.
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